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Willamette Valley: Value in Vineyards?
08/09/2019 5:00 am EST
Willamette Valley Vineyards produces wine and sells it in the United States and internationally. Named “One of America’s Great Pinot Noir Producers” by Wine Enthusiast, the winery is also unique for its shareholder community of 16,000 wine enthusiasts who receive benefits such as discounts and invitations to events.
Besides Pinot Noir, it also produces Chardonnay, Pinot Gris, Pinot Blanc, Méthode Champenoise Brut, Rose, and Riesling branded wines under the Willamette Valley Vineyards and Elton labels. It also produces under the Tualatin Estate Vineyards, Griffin Creek, and Oregon Cellars labels.
It owns and leases more than 900 acres of land, and markets and sells its wine directly through sales at the winery, its mailing lists, and through distributors and wine brokers.
Willamette Valley Vineyards was the first community-funded winery in the nation, obtaining permission in 1989 from the Securities and Exchange Commission for a self-underwritten public offering of common stock under Federal Regulation A. The company’s stock was listed on NASDAQ in 1994.
Since 2009, sales growth has averaged 4.1% a year. After bottoming in 2012, sales have grown consistently at an average annual rate of 11.3%.
Earnings per share growth has been less consistent, owing in large part to the nature of wine production where weather, production yields, consumer tastes, vintages that fall in and out of favor, and basic laws of supply and demand all take their toll on regular profitability.
Still, Willamette Valley has been able to generate EPS growth averaging 17.1% a year since 2009. Since 2011, EPS growth has been tracking at 10.7% a year.
EPS in 2018 declined for two main reasons: lower income taxes paid in 2017 due to Federal corporate tax reform and higher preferred dividends paid out due to the 2017 offering of additional preferred shares.
In the first quarter ended March 31, 2019, sales grew 10.3% to $5.0 million, with more wine sold in the company’s tasting room, through its wine club, and in bulk wine sales. EPS were up 50% to $0.03, driven by higher sales and a lower income tax rate.
Willamette Valley’s future looks promising due to a number of macro trends and coming initiatives. Helping to broaden Willamette Valley’s exposure and marketing are several projects. Willamette Wineworks is coming soon to Folsom, California, in the revitalized Historic Folsom Station.
The venue will feature food and wine pairings and a hands-on blending experience. Bernau Estate and Vineyard is expected to open in 2020 near Dundee in the heart of Oregon wine country, where the company will make méthode champenoise sparkling wines from biodynamically-grown grapes.
A 15-acre vineyard has been planted in SeVein, on the Oregon side of the Walla Walla Valley. This area is home of some of the highest quality vineyard land in the world anchored by the renowned Seven Hills Vineyard. In April, 2018, Willamette Valley released the inaugural 2015 vintages of Pambrun Merlot, Cabernet Sauvignon, and Chrysologue. A tasting room is planned for this location.
Finally, Willamette Valley leased the much-lauded Elton Vineyards in 2007 following the retirement of its owner, and is building a winery and tasting room adjacent to it focusing on small lots of premium Pinot Noir and Chardonnay.
We expect modest 9.0% annual growth of revenues and EPS from Pre-tax profit margins have been relatively stable at around 17%, and much better than other similar sized companies in Willamette Valley’s industry group. Return on equity has been struggling to break 10% and typically ends up in the high single digits. This is actual better than the industry average ROE of 6.6%.
Long-term debt-to-equity is trending down and ended 2018 at 22.0%. By comparison, the weighted average % long-term debt to equity for the “Beverages–Wineries and Distilleries” industry is 117.0%.
Wiallamette Valley is thinly traded, so price action is generally very modest. Insiders own around 25% of outstanding shares, and many individual investors are wine enthusiasts who own shares primarily for the sense of community and other benefits.
Owners of 100 or more shares of Willamette Valley Vineyards are eligible to claim “Ownership” status, which confers discounts and other privileges. (You must contact the company to register your status.) The current P/E ratio of the stock is 17.7, slightly higher than the average P/E of 17.4.
Our target high price of $15 is just over a doubling of the current price of $6.85, reached if the P/E reaches 20 and the EPS reach $0.74. On the downside, a low P/E of 14.7 times fiscal 2018 EPS of $0.37 provides a low price of $5.40.
The reward/risk ratio is 5.6:1, and the potential annual return is 16.8%. With the stock near its 52-week low and near-term prospects looking favorable, this could be an ideal time to invest.
Periodically, Willamette Valley issues preferred stock identified by the ticker WVVIP. These shares are offered direct to investors and are not listed and not eligible for listing on the NASDAQ. Preferred stock shareholders can use their dividends as credits for wine purchases at an additional discount.
We would also caution that the average daily volume of WVVI is 3,995 shares. We advise investors to be aware of the risk when selling a position that is larger than 10% of the average daily volume since order fills can be significantly impacted when trying to exit a position all at once.
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